Credit card payments for taxes rising

More than 2.6 million people in the United States paid their taxes using a credit card in fiscal year 2009, with payments totaling $2.2 billion.

Internal Revenue Service statistics show that increasing numbers of people pay taxes by credit card — in the past 15 years, 13.6 million taxpayers have done so.

There are some benefits, said Eduardo Martinez, spokesman for ClearPoint Credit Counseling Solutions, a Virginia-based financial services nonprofit organization.

It's convenient for cash-strapped taxpayers who want to avoid paying IRS late fees, he said. It can be faster than setting up an IRS installation payment plan, and some credit cardholders may earn reward points.

But the national average credit card interest rate hovers around 14.5 percent — and higher, said Ben Woolsey, spokesman for Creditcards.com, a Texas-based credit card information company.

"They're going to do it when they feel like they have no other avenue," Woolsey said. "In reality, it's the most expensive way to pay your taxes and the least advisable. It puts you into debt for something that's truly nondiscretionary."

Consumers must also pay a processing fee through an IRS-sanctioned service provider, Martinez said. The 1997 Taxpayer Relief Act authorized the IRS to accept credit card payments for federal taxes, but the agency cannot pay processing fees.

The benefits argument is negligible, Woolsey said.

"Most rewards on credit cards tend to average around 1 percent," Woolsey said. "Getting into debt is going to wipe out any benefit pretty quickly."

Some taxpayers might see tax-related credit card debt as preferable to debt with the IRS, Martinez said.

"Credit card companies will not send you to jail, but the IRS will," Martinez said. "The IRS can cause a real, real problem."

But missed payments to credit card companies can still lead to late fees, lower credit scores and decreased credit availability, Martinez said.

The IRS maintains an online list of service providers, and list typically accepted cards — American Express, Discover Card, MasterCard and Visa.

The IRS does offer other options for people needing help with paying their taxes. In 2009, 3.2 million people were approved for installment plans, said IRS spokesman Raphael Tulino.

"If you owe less than $25,000, you can automatically get approved," Woolsey said. "It's probably a wise option, but certainly not as convenient as a credit card."

Those who owe less than $25,000 in taxes (including taxes, penalties and interest) can in general apply and be automatically approved on the IRS Web site for an installment plan. But those who owe more than $25,000 must work with the IRS and show various forms of financial information in order to create the plan, which can take up to 30 days, according to the IRS.

Interest rates on the installment plans can be as low as 4 percent; however, they can go as high as 25 percent for those who fail to file or fail to pay.

Martinez said that during a personal family emergency, he once liquidated some assets. He then owed $2,000 in taxes, which he couldn't immediately pay, he said. So he went with an IRS payment plan.

"It was not a cheap one," he said. "The payments were as low as $50 a month, but the interest was pretty wild — almost 25 percent in my particular case."

Meanwhile, his credit card interest rate was about 15 percent, he said. Credit card processing fees can be a percentage ranging from 1.95 percent to 2.49 percent, Martinez said.

As of 2009, whatever portion of that processing fee exceeding 2 percent of a taxpayer's gross annual income becomes tax deductible, Woolsey said.

For example, a taxpayer might gross $50,000 for the year. Any portion of the fee over $1,000 would then become deductible.

Irene Villegas, who owns Irene's Income Tax in Oxnard, said her clients, mostly bilingual or Spanish-speaking people working in labor, gardening, construction or medical fields, haven't shown much interest in paying by credit card.

"I would say zero," she said. "People are paying by check, money order or cashier's check."

Patty Guertler, spokeswoman for Surepath Financial Solutions in Camarillo, suggests that another option for cash-strapped people might be taking out a personal loan. She hasn't fielded many credit card inquiries this year.

"For us, it has been more of a normal tax year," she said. "Part of it is that maybe they don't understand what some of the options are for them."